True Value 2010 Annual Report Download - page 24

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operation
Financial Report 2010 3
TOTAL YEAREND DEBT ($ in millions)
Third-Party Debt Member Debt
2007 2008 2009 2010
$0
$50
$100
$150
$200
$127.1
$72.6
$54.5
$141.2
$82.0
$59.2
$137.4
$115.5
$21.9
$121.5
$97.5
$24.0
Debt, shown above, includes all third-party debt and all subor-
dinated member debt. The increase in total year-end debt was
entirely due to $24,082 of additional notes issued to members
as a component of the 2010 patronage dividend. In both 2010
and 2009, True Value had no year-end outstanding borrowings
on the bank line.
OPERATIONS
True Value’s primary source of revenue is derived from the sale
of hardware, paint and paint-related products, and general
merchandise to member stores. These revenues result from ship-
ments that originate from True Value’s distribution facilities, as
well as from shipments that go direct from True Value’s vendors
to member stores. In addition, True Value realizes revenue for
services provided to members primarily related to advertising
and transportation fees.
Costs of revenue include acquisition cost of merchandise (net of
discounts and vendor incentives), warehousing and transporta-
tion costs, manufacturing costs for paint, purchasing, and costs
related to advertising and other services. SG&A costs include
headquarter and field personnel expenses, as well as marketing
and information technology costs.
The success of True Value is dependent upon continued sup-
port from its members in the form of purchases of merchandise
and services for their retail and/or industrial distribution outlets.
Risk factors that could have a significant negative effect on True
Value’s profitability include significant declines in membership,
declines in the levels at which members purchase merchandise
and services from True Value, increases in market share of the
various other entities that compete in the hardware industry or
a further decline in the general U.S. economy.
RESULTS OF OPERATIONS FOR 2010
COMPARED TO 2009
NET REVENUE
A reconciliation of Net revenue between 2010 and 2009 follows:
% of
Net 2009 Net
($ in thousands) Revenue Revenue
2009 Results $1,823,325 100.0%
Comp Store Sales:
Warehouse revenue 6,952 0.4%
Vendor-direct revenue 1,767 0.1%
Paint manufacturing revenue (3,754) (0.2%)
Net Comp Store Sales 4,965 0.3%
Change in participating members:
Terminated members:
Warehouse revenue (28,127) (1.5%)
Vendor-direct revenue (10,728) (0.6%)
Paint manufacturing revenue (1,610) (0.1%)
Net terminated members (40,465) (2.2%)
New members:
Warehouse revenue 12,315 0.7%
Vendor-direct revenue 5,507 0.3%
Paint manufacturing revenue 585 0.0%
Net new members 18,407 1.0%
Net change in participating members (22,058) (1.2%)
Advertising, transportation and
other revenue (2,214) (0.2%)
Total change (19,307) (1.1%)
2010 Results $1,804,018 98.9%
Net revenue for the year ended January 1, 2011 totaled $1,804,018,
a decline of $19,307, or 1.1%, compared to last year. Merchandise
categories with notable sales decreases included plumbing &
heating, paint, and lawn and garden. These particular category
declines were largely driven by a sales decrease in handled prod-
uct ordered through True Value’s distribution network. The overall
reduction in net revenue was predominately in the net change in
participating members’ category which generated lower revenue
of $22,058 as sales to terminated members declined $40,465, or
($ in thousands)